Analysis

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Industrial research and development (R&D) declined by 3% between 2006 and 2007, when measured in constant 2002 dollars. This represented a continuation of the trend which has seen small declines in 2005 and 2006. Current intramural R&D expenditures peaked in real terms in 2004, while both total R&D expenditures and capital expenditures for R&D peaked in 2001 (table 1 ).

The number of R&D performing firms is increasing rapidly also, particularly since the turn of the millennium, therefore the average R&D expenditure by performing firm is lower in 2005 versus 2000, at $751 thousand per firm versus $1.1 million per firm, in 2002 constant dollars ($14,330 million / 19,087 firms in 2005 and $12,674 million / 10,849 firms in 2000). It appears that industrial R&D is gaining importance as a business strategy amongst firms operating in Canada (tables 1 and 19-2).

The business expenditures on R&D (BERD) ratio, a ratio of total intramural business R&D expenditures divided by Gross Domestic Product (GDP), enables countries to be compared without reference to exchange rates and other comparative valuations of currency, such as purchasing power parity (PPP) dollars. The measure can also be used across time, without concern for calculations of constant value versus current value dollars (table 2).

Canada’s BERD ratio in 2006 was almost the same as ten years earlier, 1.06% versus 0.99%. This compares with the OECD average of 1.56%. Of the twenty selected members, only four reported lower BERD as a percentage of GDP in 2006. Between 2003 and 2006, Canada’s BERD ratio declined, as its GDP continued to rise while business R&D expenditures remained stable (table 2).

The countries with the highest BERD ratios in 2006 were the same as those with the highest ratios in 2003, and even in 1995. In 2006, Sweden reported a BERD ratio of 2.79%, followed by Japan and Korea at 2.62% and 2.49% respectively. The United States reported a BERD ratio of 1.84%, unchanged from 2003 (table 2).

After reaching a high of 1.29% in 2001, Canada’s BERD ratio fell to 1.05% in 2007. The proportion of R&D undertaken by the business sector as a proportion of all performing sectors also reached its highpoint in 2001 at 61.7%, falling to 55.8% by 2007. Canada’s share of total R&D performed by business is, and has been consistently, lower than the OECD average (table 3).

In the late 1980s, industrial research and development performance was concentrated in a few firms – 25 firms accounted for almost half of Canada’s industrial R&D expenditures. This concentration in a few firms has in recent years showed signs of weakening. In 2008, the top 25 R&D performers accounted for one-third of all business R&D; the top 100 performers accounted for just over half, at 54%. This shift largely took place between 2000 and 2002, the same time as the bursting of the tech bubble. The net effect is a wider and shallower distribution of R&D expenditures across the pool of performers (table 4).

Information and cultural industries, comprised of the publishing industries including software publishing, the Internet publishing and broadcasting industries, the telecommunications industries and the Internet service providers, accounted for just over one-tenth of industrial R&D spending (table 5-1).

Of the seven top industrial groups, two were related to computer and electronic product manufacturing: communications equipment industries (such as telephone apparatus manufacturing, radio and television broadcasting and wireless communications and other communications manufacturing) which accounted for 10% of R&D expenditures; and semiconductor and other electronic components at 6%. Computer system design and related services accounted for 7% of spending further indicating the importance of information communication technologies to Canadian industrial R&D expenditures (table 5-1).

Scientific research and development services (8%), pharmaceutical and medicine (7%) and aerospace products and parts (6%) round out the most important industrial groups to R&D expenditures (table 5-1).

Manufacturing firms accounted for just over one-half of all industrial R&D expenditures 52.8%. Services industries accounted for the vast majority of the remainder at 41.2%. Resource industries, utilities and construction combined accounted for the remainder of 6.0% (table 5-1).

Within the manufacturing sector, computers and information and communication technology (ICT) related industries represent 16.4% of all industrial R&D, while all chemicals manufacturing accounted for 9.4% and transportation industries accounted for just over 9.3% (table 5-1).

Information and cultural services is the largest of all of the service sector industry groups in terms of R&D expenditures at 11% of total R&D expenditures, but all professional services (NAICS 54 includes four of the industry categories from architecture, engineering and related services through to scientific research and development) account for 18% of total R&D expenditures (table 5-1).

The scientific R&D services industry accounts for 8.3% of all industrial R&D expenditures and is composed of a variety of types of companies. Some are the R&D equivalent of accounting, legal and other business service firms. These firms are contract research firms that conduct research for a fee and provide some form of analytical outcome as a product. Other firms in this industry are “venture firms” which are heavily engaged in R&D activities on their own account, but which do not yet have significant sales to cover these and other operating costs. Many of these firms are biotechnology firms. There are, however, firms engaged in research on communications technologies, instruments or energy. In terms of R&D expenditure, biotechnology and ICT-related R&D dominate this industry (table 5-1).

Of the industries in the remaining sectors, oil and gas extraction has historically been the most significant R&D performing industry (table 5-1).

Provincial performance of R&D tends to mirror the general economic activity within the province. Ontario has higher than average concentration of R&D in the manufacturing sector, while Alberta dominates R&D by oil and gas extraction firms (table 5-3).

Manufacturing and service sector R&D accounts for about 95% or more of all industrial R&D in all regions and provinces except Saskatchewan and Alberta where they account for just over half (table 5-3).

Atlantic Canada and Quebec report very similar distributions of R&D by sector, with manufacturing accounting for about 55% and services for 40. In Atlantic Canada, important industries for R&D include: information and cultural services, computer systems design, scientific R&D services and pharmaceuticals and medicine which all reported $20 million or more in industrial R&D expenditures. Quebec’s most significant industries included information and cultural services, computer systems design and related services, scientific R&D services and pharmaceuticals, but also aerospace and health care and social assistance services. Each of these industries and industry groups reported more than $250 million in R&D expenditures (table 5-3).

Ontario and Manitoba show similarities at the sector level as well, with manufacturing accounting for about 61% and services close to 36%. In Ontario the following industries reported more than $500 million in R&D expenditures: communications equipment, information and cultural services, semiconductors and other electronic components, computer systems design and related services (all ICTs), pharmaceuticals and medicine and lastly motor vehicle manufacturing. Very little detail was available for Manitoba but scientific R&D services and wholesale trade are among the important R&D performing industries (table 5-3).

As noted above, Alberta and Saskatchewan show similar low levels of R&D in manufacturing and services. For Saskatchewan, machinery, architectural, engineering and related services and wholesale trade each accounted for $10 million or more in industrial R&D expenditures. In Alberta, energy is the central focus of much of the industrial R&D performed. In addition to $440 million in R&D undertaken by the mining and oil and gas extraction sector, the next largest contributor was petroleum and coal products manufacturing. In the service sector firms: computer systems design and related services, architectural, engineering and related services, wholesale trade and information and cultural industries, were the largest performers of R&D (table 5-3).

British Columbia stands alone in reporting a majority of R&D being performed by firms in the service sector (62.9%). Information and cultural industries firms reported the highest levels of R&D performance, followed by scientific R&D services and then computer systems design and related services. In the manufacturing sector paper products reported the highest levels of industrial R&D (table 5-3).

Intramural R&D expenditures by country of control remained virtually unchanged over the period 2004 to 2006. Two-thirds of the R&D performed was undertaken by Canadian-controlled enterprises, 22% by U.S. controlled enterprises and the remaining 12% by firms of other countries’ control (table 5-4).

Canadian-controlled firms performed two-thirds of industrial R&D, but there were major differences between industries. Enterprises in resource industries such as Forestry and logging and Fishing, hunting and trapping performing R&D were 100% Canadian controlled (table 5-5).

The proportion of R&D performed by Canadian-controlled firms continues to be higher for the service sector than for manufacturing. In energy, the share performed by Canadian-controlled firms has held steady at around 53%, while the figure for the mining sector has been volatile, perhaps due to changes in ownership in the sector (table 5-5).

The firms with the largest R&D budgets together performed the vast majority of industrial R&D. Those with annual R&D budgets of $1 million or more performed 82.7% of all industrial R&D in 2006. What is interesting is that this was a slight decline from 85.9% in 2002 (table 5-6).

Funding for industrial R&D activities can come from a variety of sources, both private and public. The share of funding from public sources of funds, be they federal grants or contracts, provincial sources or other Canadian sources has dropped steadily over the period 1981 to 2006, such that by 2006 almost all (98%) industrial R&D was funded by private sources. This is a drop from the figures reported in the 1980s when the public sources accounted for between 10% and 13% (table 6-1).

Private sources range from the performing company, companies related to the performing company, other unrelated companies and foreign firms, related or not. The performing company has always been the primary source of funding for R&D activities, and this source has been at an all time high since 2002, during which time it has accounted for almost 80% of all industrial R&D funding. The share of funding from companies related to the performing companies has dropped over the years from a high of 7%, in 1989, to the current figure of 3%. R&D contracts in 1993 and 1994 accounted for 4% of all funding, but by 2006 this had dropped to 1%. Foreign funding reached its peak at 28% in 2000. The most recent figure, from 2006, indicates that foreign sources of funds accounted for 15% of all industrial R&D funding (table 6-1).

Sources of funds varies significantly by the amount of R&D expenditures. As the firms’ total expenditures on R&D increase, the amount of funds obtained from outside the firm also steadily increases. The largest shift in funding occurs amongst R&D performing firms with the largest R&D budgets ($1 million or more per year); these firms obtain one-quarter of their funding outside the performing firm, compared with over 90% of such funding coming from inside the firm for all other categories (table 6-3).

Funds for R&D performance for Canadian-controlled firms are much more likely to come from within the firm than for their foreign-controlled counterparts. Canadian-controlled firms obtained less than 5% of their funding from outside Canada, while U.S.-controlled firms obtained 37% of funding from outside Canada and other foreign-controlled firms obtained 35% from outside (table 6-4).

Expenditures on R&D can be broken down into two main groups: current and capital. Current expenditures include wages and salaries and “other” current expenditures. These other current expenditures typically include items which are consumed within the year, for example lab supplies like test strips for measurement devices. Note that the purchase of the device itself would likely be a capital expenditure, as capital expenditure are for items that last for years and therefore must be capitalized over their useful life (table 7-1).

Current intramural expenditures on R&D accounted for 94% of total intramural R&D expenditures, while capital accounted for 6%. The figures for manufacturing and services were identical, at 95%. Petroleum and coal product manufacturing was significantly different from the other reporting industries in that only 79% of its total R&D expenditures were for current intramural expenditures (table 7-1).

Overall, 59% of current intramural R&D expenditures were for wages and salaries, but there were differences between the manufacturing and services sectors and between industries. Manufacturing firms reported 56% of all current intramural R&D expenditure were allocated to wages and salaries, while for firms in the service sector the figure was 66%. Firms in mining and petroleum and coal products reported the lowest figures of 25% and 21% respectively. Amongst industries in the manufacturing sector, those in which not much R&D was performed, printing, other computer and electronics products and furniture and related product, reported the highest proportion of expenditures composed of wages and salaries. In the service sector three industries in professional services, architectural, engineering and related services, computer system design and related services and management, scientific and technical consulting services, reported the highest share of expenditures composed of wages and salaries (table 7-2).

The distribution of current intramural research and development expenditures largely mirrored the distribution of total intramural research and development expenditures, with the exceptions of Saskatchewan and Alberta. These two provinces reported current expenditures at 72% and 81% of total R&D expenditures respectively (tables 5-2 and 7-3).

R&D expenditures as a proportion of firm revenues declined slightly between 2002 and 2006, from 1.9% to 1.7%. This decline was reported across almost all revenue size categories. Firms with the lowest revenues report the highest ratio of R&D to revenues, at 38.1% for firms with revenues of $1 million or less, compared with 1.0% for firms with revenues of $400 million or more (table 7-4).

Canadian-controlled firms have consistently reported higher R&D expenditures to revenues than foreign-controlled firms in the interval 2002 to 2006. The overall R&D intensity measure declined slightly, but the decline was a result of a decline reported by the foreign-controlled firms. The R&D intensity of the Canadian-controlled firms remained stable (table 7-5).

In 2006, in most industries, Canadian-controlled firms reported higher R&D intensities, measured as a proportion of firm revenues, than foreign-controlled firms (table 7-6).

While the average R&D intensity was 1.7% in 2006, some industries reported much higher levels. Amongst all the industries, scientific R&D services firms reported the highest R&D intensity at 37.1%, followed by firms in health care and social assistance at 24.9% and communications equipment at 16.6% (table 7-6).

As with virtually all business statistics, the population of R&D performing firms consists of two groups – the largest firms which are few in number, but which account for the majority of economic activity and the large pool of smaller firms which account for much less activity. Amongst R&D performing firms, firms with revenues less than $50 million account for 94% of the population and 34% of total R&D performed. By contrast, the 258 largest firms, with revenues of $400 million or more, performed 44% of all industrial R&D and reported spending an average of $26.9 million in 2005 (table 8).

Capital intramural R&D expenditures held fairly steady in current value dollar terms from 2004 to 2007, but reported intentions may indicate a drop in 2008. This drop appears to be at least in part due to a drop in capital R&D expenditures by firms in the service sector (table 10).

Approximately six in 10 of all R&D personnel were professionals and the remaining four in 10 were technicians and other personnel. The share of professionals was higher in Alberta, British Columbia and northern Canada and lowest in Newfoundland and Labrador, Prince Edward Island, Manitoba and Saskatchewan (table 12-2).

The distribution of R&D personnel by occupational category also varies by industry. The share of professionals was higher in service sector than in manufacturing (table 12-3).

Industries with particularly high proportions of professionals fell into two groups: those associated with ICTs (both manufacturing and services ICT industries) and professional services (NAICS 54). Industries with particularly low proportions of professionals tended to fall within industries with lower R&D intensities: agriculture, textiles, printing and furniture and related products. In the service sector, firms in health care and social assistance reported the lowest proportion of professionals (table 12-3).

The share of R&D personnel which is composed of professionals fell slightly between 2002 and 2006, from 62% to 59%. This was matched by a proportionate increase in the share of technicians from 27% to 30%. The other R&D personnel remained close to 12% of the total (table 12-4).

The largest changes in the number of R&D personnel by occupational category occurred between 2003 and 2004 for professionals and technicians, and between 2002 and 2003 for the other R&D personnel (table 12-4).

Professional R&D personnel can be divided by highest degree obtained. In 2006, three-quarters of all professional R&D personnel engaged in industrial R&D had a bachelor’s degree, 17% had a master’s and 7% held a doctorate (table 13).

Firms can perform R&D in-house or they can pay someone else to undertake the work. Of the seven industries with the highest intramural R&D expenditures, four (pharmaceutical and medicine, communications equipment, information and cultural industries and scientific research and development services) are also the highest in terms of extramural payments for R&D services. Computer systems design and related services report a high level of extramural payments, but not as high as wholesale trade. Aerospace products and parts by contrast, reported very low levels of extramural payments for research and development, and no data were available for semiconductors and other electronic components (table 14-1).

Over $1 billion of industrial R&D was related to biotechnology in 2004 through 2006. The vast majority of this research was undertaken by firms in the service sector, followed by those in manufacturing and lastly by firms in the agriculture sector. The amount of funds expended on biotechnology R&D fell between 2004 and 2006 (table 15-1).

R&D expenditure on pollution reduction have held steady between 2004 and 2006, with the largest share of such research performed by the manufacturing sector. Pollution-related research increased in Mining and oil and gas extraction industries as well as Utilities between 2004 and 2006 (table 15-2).

R&D related to the development of software increased steadily between 2004 and 2006. As a proportion of total intramural R&D expenditures, software has increased from 23% in 2004 to 26% in 2006. Software is a larger share of total intramural R&D spending in the service sector (37%) than in the manufacturing sector (20%) (tables 5-1 and 15-3).

For Canadian technological balance of payments (TBP), the estimates are taken only from firms performing or funding at least $1.5 million of research and development (R&D) starting with 2006, for earlier years, the TBP represented firms performing or funding at least $1 million of R&D. The statistics which appear in tables 16-1 and 16-2 are taken from the survey of industrial R&D rather than from balance of payments surveys. The payments and receipts for technology, other than R&D, are therefore, incomplete since data from firms not included in the R&D survey are not available (table 16-1).

Technological services are composed of R&D and “other” technological services. These services are typically performed intramurally, but they can also be purchased from a source within or outside of Canada. Similarly, Canadian firms can perform technological services for firms outside of Canada. In 2006, Canadian firms obtained receipts of $2.9 billion and made payments of $1.5 billion, for a net balance of payment for technological services of $1.3 billion. The mining and oil and gas extraction sector was almost neutral in terms of payments and receipts, while the manufacturing sector reported almost $150 million more in receipts than payments. It was, however, “other industries” which accounted for the vast majority of the positive balance (table 16-1).

In 2006, R&D activities accounted for over 85% of technological services receipts and almost 80% of payments. This contrasts with 1997, when R&D accounted for 90% of all technological services receipts but only just over 57% of all payments (table 16-2).

Throughout the period 1997 to 2006, the balance for technological services was always positive, as was the balance for R&D activities. The balance for “other” technological services was strongly negative in 1997, but small and positive from 2003 onward (table 16-2).

Over 60% of all intramural R&D related to energy was related to fossil fuel energy, this was followed by R&D related to conservation (table 17).

R&D expenditures on therapeutic health products reported a significant shift in the type of performing organization. In 2005, brand name pharmaceutical firms accounted for the largest share of such R&D, accounting for 56% of the total. Projected data for 2008 indicate that biotech firms account for half. This is most likely to be a result of reclassification of existing therapeutic health R&D performers rather than major changes in the levels of R&D being performed by the largest firms in each category (table 18-1).

Biotechnology or biopharmaceutical companies (50%) and brand name pharmaceutical companies (27%) dominate therapeutic health product R&D in Canada. There has been a noticeable shift from brand name pharmaceutical companies to biotechnology or biopharmaceutical companies since 2005 (table 18-1).

Three-quarters of a billion dollars ($744 million) were dedicated to research and development on therapeutic products in 2006. Excluding the category, “various others” ($120 million), the therapeutic class of the most importance ranked on R&D expenditure continued to be anti-infective for systemic use ($113 million). This area of research encompasses therapeutics capable of killing or inhibiting the growth or spread of infectious agents through the body, thus including treatments such as vaccines, antibacterials and antivirals (table 18-2).

Other important therapeutic classes for health product R&D are: antineoplastic and immunomodulating agents ($81 million); nervous system therapeutics ($76 million); and, blood and blood forming organs ($70 million) (table 18-2).

In 2005, there were 19,087 R&D performers in Canada. Of these, the vast majority of firms (96%) were Canadian-controlled. Of the remaining foreign-controlled firms, more than half were U.S.-controlled firms. R&D performers in forestry and logging and management, scientific and technical consulting services were 100% Canadian-controlled. At the other end of the spectrum, of the R&D performing firms in oil and gas extraction, petroleum and coal products and pharmaceutical and medicine were the least likely to be Canadian-controlled. In the service sector, firms in information and cultural services were the least likely to be Canadian-controlled; even so, almost 95% of these firms were Canadian-controlled (table 19-1).

No sector accounted for the majority of R&D performing firms, but the service sector came closest with 47% of all R&D performers (table 19-1).

The number of R&D performers has increased dramatically, by 75.9% from 2000 to 2005. This occurred while the total number of firms in Canada declined slightly (table 21). The greatest change in absolute numbers took place in Ontario, where performers almost doubled from 3,812 to 7,484 (table 19-2).

Quebec continued to report the highest number of R&D performing firms at 7,739 in 2005. Together the share of “central Canada”, Quebec and Ontario, grew from 77% to 80% between 2000 and 2005. The shares of the other regions fell accordingly, with the exception of the North which reported a large percentage change from a very small base (table 19-2).

R&D can be viewed as a business strategy. Business strategies attempt to position a firm in the most advantageous way relative to its competition in the market. The decision to perform R&D therefore represents a wager of sorts, that the expenditures incurred to perform the activity will generate some knowledge that will enable the firm to strengthen, or at least maintain, its position relative to the competition. Propensity data provides a snapshot of all of the firms which were performing R&D in a given period as a proportion of all firms in operation at that time. It is therefore interesting to note that the propensity to perform R&D has increased rapidly from 2000 to 2005, and that this occurred across all business sectors. This may represent a response to an increasingly competitive, global marketplace whose pressures cannot be avoided in protected local markets (table 19-3).

Overall, R&D performers represent a very small proportion of all business in Canada, only 2%. This varies by sector, with only 0.5% of all construction firms performing R&D versus over 15% of firms in the manufacturing sector. Propensities varied significantly by industries within each sector as well (table 19-3).

In some industries, R&D is almost a “price of admission”, with half or more of all firms in communications equipment and pharmaceutical and medicine reporting that they performed R&D in 2005. Other industries which reported high propensities to perform R&D include some expected industries like computer and peripheral equipment, semiconductors and other electronic components, navigational, measuring, medical and control instruments, aerospace products and parts and scientific R&D services, which are generally viewed as R&D intensive. The data also include some surprises however. Approximately one third of all firms in petroleum and coal products and primary metals (ferrous) and primary metals (non-ferrous) reported performing R&D in 2005. Other fairly high propensity industries include paper, other chemicals, plastic products, rubber products, machinery and motor vehicles and parts which all reported more than 20% of all firms engaged in R&D in 2005. Even industries such as food, textiles, non-metallic mineral products and fabricated metal products, each reported more than 10% of all firms engaged in R&D in 2005 (table 19-3).

In addition to scientific R&D services and computer systems design and related services, industries of interest in the service sector also include information and cultural industries and architectural, engineering and related services, which both reported more than 5% of all firms engaging in R&D (table 19-3).